Why You Should Never Sell Your House
Holding an Appreciation Bearing Asset is Never a Bad Thing
Wait….what? You mean to say…I SHOULD NEVER SELL MY HOME? But…that’s not what my Realtor told me!
Yep…the propaganda is thick. Selling your home instead of holding long term and renting is a common trait these days. I mean…why would the housing industry want you to sell your home when so many industries get paid when you do sell:
- Title Insurance Companies
- Home Inspectors
The list goes on and on.
Cost to Sell a Home
Example: $500,000 single family home in Illinois with no HOA
Title Insurance : $2370
Reality Commission (6%): $30,000
County and State Tax : $750
Recording Fee : $100
Wire Transfer : $80
And this is not including any closing cost credits or property tax proration credits.
Fear of Property Management
I find many homeowners are fearful of having their property rented because of perceived damage to the home.
While this fear can be justified if you are renting without screening applicants or for a storm term rental, deposits can supplement this risk as well as proper insurance.
A second concern can be the need to make sure rent is paid on a timely basis. Again, this fear can be subdued by screening properly and looking into products like Surevestor as a form of rental payment insurance.
Perhaps the trickiest objection I come across is the ability to inspect a property. While tough to perform from a distance, it’s possible to perform by contracting a cooperatively local Realtor or property management company and working with the tenant.
Tax Benefits from Renting
Thanks to the 2017 tax reform bill, standard deductions went up making the ability to itemize increasingly difficult. This doesn’t hold true for rental property!
By renting your home rather that selling, you can take advantage of reducing Schedule E income in the following format (consult your Tax Professional first!) :
- Depreciation of Real Property
- Cost Segregation Depreciation of Personal Property (Consult Cost Segregation Engineer)
- Management Fees
- Leasing Commissions
- HOA Dues
- Property Taxes
- Various Other Expenses Associated to Property
By taking these expenses into account and by having your personal residence become a rental property, you will supercharge your tax advantages!
Continued Principal Paydown
Furthermore, take into consideration that you will continue to paydown your principal every month.No longer will this principal be paid down by you…
Mortgage principal will be paid down by your tenant!
Imagine…you continue to build your net worth by having the mortgage principal paid down and you have someone else doing this for you.
This reason alone makes selling your home a foolish venture.
“But I Don’t Have Enough Money for a Downpayment on a New Home…”
Makes good sense, but, there are ways around this.
- Refinance your Home and take cash out
- Take out a HELOC and make interest only payments on the amount borrowed for 10 years.
Either option can provide a downpayment. Having 3.5% downpayment or more is the critical piece to qualify for FHA mortgages or conventional mortgages.
What if My Hone Doesn’t Net a Profit when Renting?
Well…this may the closest thing to a real argument.
At the end of the day, this is where accounting for the “Internal Rate of Return” becomes important.
In essence, we are measuring the return of the:
- Rental Cashflows
- Principal Paydown
- Appreciation of Property upon Sale
Against the original investment.
So, if rental cashflows are negative but principal pay down and a positive gain from sale of property is in place, we may net a positive internal rate of return. This, justifying that selling the property does not make sense.
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